Great Depression

The Great Depression was a worldwide economic upheaval
that is generally considered to have begun with the United States stock market
crash of 29 October 1929. This triggered a downwards spiral of bank
failures and unemployment that, by 1933, had put 25% of the U.S. work
force out of a job. The effects spread around the world, and among the
countries worst hit were Germany
and Japan.
Most historians consider the Great Depression to have encouraged the
rise of authoritarian regimes in these countries, triggering the chain
of events that ultimately led to the Second World War.

United States. Roosevelt
sought to counter the Depression with the New
Deal, a massive centralization and expansion of government economic
powers. It was, and still is, a
controversial program, both on constitutional and economic grounds, and
a number of economists believe that the New Deal actually prolonged the
Depression by distorting market signals and increasing uncertainty
among businesses. The tremendous impetus given by the rearmament
programs prior to the war were much more effective in stimulating the economic recovery.

During the Depression years, Roosevelt
took a strongly
populist position, blaming Wall Street and big business (the "economic
royals") for the Depression. This theory was enormously popular with
large numbers of voters, but few economists today believe that there is
any substance to the theory. A more plausible explanation is that the Depression was the result
of the Federal Reserve's failure to expand the money supply following
the severe contraction triggered by the stock market crash of October
1929.

Most of the money supply of the United
States is in the
form of bank deposits and other instruments rather than actual dollar
bills. When 1928 saw record numbers of new stock issues, and the
Federal Reserve cut the prime interest rate in an effort to prevent Britain
from going off the gold
standard, speculation in stocks overheated the market and a crash was
all but inevitable. The crash resulted in numerous bank failures, 90%
of which were of small banks in states that had unit-banking laws
forbidding banks to have more than one branch. These banks lacked a
diverse investment base and were vulnerable. With their collapse, a
third of the United States' money supply disappeared. This contraction
meant that consumers and businesses had less money with which to buy
goods or raw materials. This in turn resulted in reduced demand,
canceled orders, and layoffs of workers.

Herbert Hoover, who was President at the
time of the
crash, did nothing to increase the money supply. Neither did Roosevelt
after his election. (In fairness, it was not until the 1950s
and
1960s that economist Milton Friedman identified bad monetary policy as
the likely cause
of the Depression, for which he later received the Nobel
Prize.) What Roosevelt did instead was to centralize the Federal
Reserve system, ensuring that the mistakes of even fewer people would
have an even greater effect on millions; institute deposit insurance
with fixed premiums, so that insolvent banks would be subsidized by
solvent banks (the full effects of which were seen in the 1980s with
the savings and loan bailout); raise taxes enormously, ensuring that
there was even less cash for investment in new enterprises that might
have created jobs; impose confiscatory taxes on businesses that
retained profits, making it harder for these businesses to accumulate
capital; institute massive jobs programs that shifted money to
politically important states without actually increasing the money
supply; artificially hold up wages through laws supporting labor
unions, which ensured that massive unemployment would continue,
particularly among African-Americans
(who were excluded from most
unions); fix prices for hundreds of commodities, ensuring that there
would be surpluses or shortages, depending on how the fixed price
compared with the market level; and artificially raise agricultural
prices through the perverse mechanism of destroying produce at a time
when many were hungry.

The New Deal did violence to traditional
economic rights, which the Roosevelt administration
dismissed as "secondary", and greatly extended the federal powers. The
Supreme Court struck down important early New Deal legislation as
unconstitutional, but Roosevelt succeeded in pressuring swing voters on
the Court to ensure support for later measures. The resulting court
opinions were marvels of twisted reasoning that ran roughshod over both
precedent and the written Constitution.

Some economists take a more positive view
of the New Deal, arguing that it prevented the United States from
succumbing to Fascism by giving hope to those hit hardest by the
Depression. This reflects the thinking of Roosevelt himself, who
declared in his first inaugural address that "the only thing we have to
fear is fear itself." These economists also argue that programs such as
Social
Security and deposit insurance are a lasting positive legacy of the New
Deal, in spite of their flaws.

Nevertheless, the rightness of Roosevelt's policies towards the
Axis should not blind one
to the flaws in Roosevelt's economic policies. Roosevelt had to back
away from his
populist
economic policies after the recession of 1938, which
left the public increasingly dissatisfied with the New Deal.
The gathering storm
clouds abroad convinced Roosevelt that he had to have the support of
big business if the country was to rearm for war. By then, the future
Axis powers
had grown contemptuous of the United States, which had failed to
recover when their own economies were seemingly booming again. This may
have been
a factor in the failure of appeasement and deterrence in the final
years of peace.

Japan. The Great Depression was severe in rural Japan, particularly in the northeastern part of Honshu, where falling prices for rice
and silk led to famine. Silk was Japan's major source of dollars,
peaking in 1929 at $363
million dollars and employing some 2.2 million Japanese farm
households, mostly in Nagano prefecture. Some rural Japanese tenant
farmers were
driven to selling their daughters into prostitution and encouraging
their sons to emigrate to Korea and Manchuria.

The effects of the Depression in Japan were compounded
by the Smoot-Hawley Tariff Act of 1930, one of the most misguided
pieces of legislation ever enacted by the U.S. Congress. This imposed
draconian tariffs on imported goods in order to prop up domestic
producers, but it also raised prices of goods for consumers and
provoked retaliatory tariffs from other nations that deepened the
worldwide depression. The traditional ceiling of 90% total tariffs on
an imported good, which based on the belief that any industry that
could not compete even with a factor of two cost advantage didn't
deserve protection, was thrown aside. Japan was particularly hard hit
by the tariffs, since the collapse of
the silk market forced Japan to look for other export markets just as
Smoot-Hawley slammed the door on Japanese penetration of such
markets. Smoot-Hawley came just as the japanese had decided to
put the yen back on the gold
standard. Attempts to prop up the yen drained half the Japanese gold
reserves, worth about $500 million in 1930, in less than a year.

These economic disasters fueled popular resentment against capitalism and democracy as embodied in the zaibatzu, Japan's large industrial combines, and the political parties, which were perceived to be tools of the zaibatsu. Talk of a Showa Restoration, which would sweep away corrupt Western values, was accompanied by the preaching of hakkō ichiu (八紘一宇
"the eight corners of the world under one roof"), which amounted to
Japanese control of East Asia and perhaps beyond. This was accompanied
by the rise of numerous secret patriotic societies, such as the Black
Dragon (Amur River) Society. A conspiracy to overthrow the Japanese government took root in Ibaraki
Prefecture and led to the 26 February 1936 mutiny. The 2-26 Incident,
as it was known in Japan, marked the beginning of military domination
of the government, though the Kwantung Army had already proven its ability to act independently of the civilian government in Tokyo during the Manchuria Incident of 1931.